What is Analysis of Variance (ANOVA)?
Analysis of Variance (ANOVA) is a statistical methodology used in standard costing and budgetary control, which involves the examination of variances by disaggregating them into sub-variances. This helps identify the primary reasons for discrepancies between budgeted figures and actual figures. It provides a detailed understanding of cost management and aids in pinpointing areas that need corrective actions.
Detailed Breakdown of Major Sub-Variances
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Direct Labour Total Cost Variance: This includes variances related to total labor costs, which can be broken down further into efficiency and rate variances.
- Direct Labour Efficiency Variance: Difference between the actual labor hours used and the standard hours for actual production, valued at the standard labour rate.
- Direct Labour Rate of Pay Variance: Difference between the actual wage rate paid and the standard wage rate, multiplied by actual hours worked.
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Direct Materials Total Cost Variance: This encompasses all variances related to the total cost of materials used.
- Direct Materials Price Variance: Difference between the actual price paid for materials and the standard price, multiplied by the actual quantity purchased.
- Direct Materials Usage Variance: Difference between the actual quantity of materials used and the standard quantity for actual production, valued at the standard material price.
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Overhead Variance: Includes analysis of both fixed and variable overhead costs.
- Overhead Total Variance: Total difference between applied and actual overhead.
- Overhead Efficiency Variance: Differences stemming from the efficiency of labor or other factors.
- Overhead Expenditure Variance: Difference between actual and budgeted overhead expenses.
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Fixed Overhead Variance: Fixed overhead costs compared to budgeted amounts.
- Fixed Overhead Total Variance: Total difference between standard and actual fixed overhead costs.
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Variable Overhead Variance: Variances specific to variable overhead costs.
- Variable Overhead Total Variance: Total difference between standard and actual variable overhead costs.
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Sales Margin Variance: Differences between expected and actual sales margins.
- Sales Margin Price Variance: Difference due to selling price changes.
- Sales Margin Volume Variance: Difference due to actual sales volume compared to the budgeted volume.
Examples
- If a company’s budgeted direct labor hours are 1000 hours at a standard rate of $20 per hour but the actual labor hours worked are 950 hours at $22 per hour, the variance can be subdivided into labor efficiency and labor rate variance.
- If the planned quantity of a raw material is 500 units at $5 per unit, but the actual quantity used is 520 units at $4.80 per unit, it can reflect variances in material price and usage.
Frequently Asked Questions (FAQs)
What is the primary purpose of variance analysis?
The primary purpose of variance analysis is to identify and explain the reasons behind variances between planned financial outcomes and actual results. This allows for better financial control and resource management.
How does ANOVA help in budgetary control?
ANOVA helps in budgetary control by breaking down the total variance into its component parts, thereby pinpointing specific areas where the budgeted amounts deviated from actual figures.
What is a favorable variance?
A favorable variance occurs when actual revenues are higher than budgeted or when actual costs are lower than budgeted.
What is an adverse variance?
An adverse variance occurs when actual revenues are lower than budgeted or when actual costs are higher than budgeted.
Can ANOVA be used in all industries?
Yes, ANOVA can be applied across various industries wherever financial performance and budgeting are applicable.
Related Terms
- Standard Costing: A cost accounting method that uses predetermined costs for product cost control measures.
- Budgetary Control: The process of managing a budget to ensure that actual financial performance adheres to the planned budget.
- Profit Variance: The difference between actual profit and budgeted profit.
- Production Cost Variance: The deviation between actual production costs and budgeted production costs.
- Direct Labor: Labor costs that are directly attributable to production of goods.
- Direct Material: Raw materials that are directly used in the manufacturing of products.
- Overhead Costs: Indirect expenses related to the overall operations of a business, such as rent, utilities, and administrative salaries.
Online References
- Investopedia — Variance Analysis
- AccountingTools — Variance Analysis
- Corporate Finance Institute — Variance Analysis
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren
- “Management and Cost Accounting” by Colin Drury
- “Cost Accounting: Foundations and Evolutions” by Kinney and Raiborn
- “Variance Analysis and Performance Measurement” by M. J. R. Gollan
Accounting Basics: “Analysis of Variance (ANOVA)” Fundamentals Quiz
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